BBLS killed the fintech loan starby
Richard Sergeant takes a look at how the government-backed schemes are reshaping the small business lending market.
It would seem the major banks continue to fire blanks with Natwest Ventures scaling down its fintech interests further with the closure of small business unsecured loans provider Esme.
Within the usual opaque press release, the success of the BBLS and CBILS offerings is cited as the primary reason.
Given that they managed to provide £100M in 2019 it does feel a little shortsighted. And with fairly competitive rates, no early repayment fees, and no personal guarantees, it takes a credible young alternative off the market.
But they are not the only provider that has been impacted by the tidal wave of government support cash.
New banks saving face from government-backed schemes
One view is that challenger bank Starling was practically saved by the pandemic – or they saved face, at least. The £100m grant from the Banking Competition Remedies (BCR) was based on the condition of lending £913m to small businesses by 2023, of which they had managed just £782,000 (less than 1%) by Dec 2019.
By November 2020, they had managed to reach £1.4 bn in government-backed loans, and avoided direct calls to hand back the remedies money. This massive boost for them in new accounts during this period also helped to boost revenues and in turn reach a breakeven position last October.
The challenge will be to see now if they can make the switch to more traditional lending, particularly if it goes hand in hand with convincing customers to use them as their primary account.
All of market not necessarily an advantage
However, It hasn’t always been positive for beneficiaries of the remedies fund. The news from Funding Options sounds a familiar chime with other lenders who haven’t had such a ‘good pandemic’.
Recent update reports on the number of additional SMEs funded in Q4 2020 being “hampered by the existence of the Government SME loan schemes which have distorted the SME finance market and, in the case of the BBLS (sic), removed much of the demand for debt finance sub-£50k.”
And this with a reported £700m CBILs being passed to 40 lenders – for these types of digital brokers it would seem that the rewards simply weren’t there for these kinds of products, and demand fell off a cliff for the higher value commissions and referral fees.
Anecdotally, online brokers generally have found it tough during the last 12 months, but word also has it that there has been an uptick in the last quarter and an optimism about the year ahead.
You can’t help thinking that this is because the government schemes, offering cheap debt, have run their course and businesses will inevitably start to look at more traditional routes.
What remains to be seen however is what all this BBLS on the balance sheet will look like to traditionally more risk aware lenders – and in turn what kind of short to medium term impact this might have on the brokerage.
However, what it does suggest, is that there are significant opportunities for other models to come into their own.
Own the blend
One of the positives we have seen is in the success of ‘mixed service providers’ like Satago – blending the credit risk analysis and credit control tools with selective invoice finance.
The subscription-based service wrapper seems to have chimed with current conditions, and provided an affordable route to quick cash for stable businesses, and aided by their accreditation for CBILS.
Recent partnerships with major bank Lloyds and ledger giant Sage also show that the cutting edge challengers don’t necessarily provide the prime market for lenders.
Operating in a similar space, Market Finance is also worthy of note. Recent announcements around record revenue for 2020 was welcomed by fintech watcher and AccountingWEB regular Nick Levine who welcomed them back to potential profitability after a miserable 2019.
It would seem to be relatively good news for Fluidly too, although their recent quarterly update report to the BCR for their slice of the remedies pie makes mixed reading. The cashflow forecasting to access funds certainly seems logical, and is popular with a constituency of accountants and it’s worth waiting to see if this can translate into financial performance.
Open, the new horizon
But there are other interesting solutions on the horizon which could make an even bigger difference.
The much-heralded iwoca pay (and in particular the tie in with Xero) gives the suggestion that little and often cashflow decisions could be in for a purple patch.
With the option for purchasers to buy now and pay in instalments at the checkout, this starts to sound attractive to many small businesses who don't want (or cannot obtain) other forms of finance.
And the significant agreement of cooperation between US open banking experts Plaid, and UKs finance API crew Codat would underline there are real options for many new entrants to come into the market – and beyond the BBLS/CBILS bubble.